Residential mortgage loans can be difficult to obtain. Real estate brokers and traditional lenders require you to go through an extensive approval process, with in-depth checks on your credit report and the need to follow banking regulations. As a result, you can be rejected for real estate loans. This is why potential homeowners often seek alternative solutions such as private mortgage loans. In this blog post, we explain what private mortgage loans are and how to become a private mortgage lender.
What are private mortgage lenders?
A private mortgage lender (PML) is an individual who provides loans for purchase of property in return for a fee paid by the borrower. PMLs can be either commercial banks or non-bank lenders that do not have their own branches but provide credit services via brokers or agents. They provide loans at interest rates that may vary depending upon loan amount, tenure, property type, credit score of the borrower, etc.
How do private mortgage lenders work?
Private mortgage lenders work in a way that’s slightly different from traditional mortgage lenders as they have the freedom to set their own boundaries. They are able to offer flexible financing options, because they’re not subject to the same restrictions and rules as banks.
They can therefore consider a wider range of factors such as income, expenses and assets. A private mortgage lender can also allow you to borrow against other assets. At the end of the day, this approach to mortgage lending is one that is governed by the lender, but can be constructed in a manner that is tailor-made for your needs and your financial capabilities.
How do you become a private mortgage lender?
Establish your business
As with any other business, in order to become a private mortgage lender, you need to set up a legal entity, known as a Limited Liability Corporation (LLC). While taking this step, you can either incorporate your own name or choose another name. The reason you need to do this is to avoid any confusion about who owns what and keep track of all the paperwork regarding your new company. It will allow you to separate your business assets from your personal assets.
Understand the law
Small business owners should work with a lawyer to determine what local laws and regulations apply to their business. For a private mortgage lender, for example, it might be necessary to comply with limits on interest rates imposed by the location where they operate.
You may also need to include certain contractual provisions into loan agreements. In some areas, it may be mandatory for lenders to perform credit checks before extending loans. Make sure you understand how these rules affect your company as a lack of understanding could get you into serious trouble.
Ensure that you have the money
Before you can even start thinking about becoming a private mortgage lender, you need to ensure that you have access to cash. Some private lenders lend money from their own savings accounts. While subjecting them to substantial risk, it does enable them to make the greatest possible return on the investment. A second option is to team up with investors. While getting capital to invest is often an arduous task, it is an essential one if you want credibility.
Decide on your criteria
Once your company is established and you have access to enough cash, the next step is to evaluate the criteria you will set for borrowers. Evaluating an individual’s ability to repay loans is crucial. As a business, you can get an account with a credit reporting agency and use information from the potential borrower’s debt report to make a determination. Alternatively, many investors use the value of a house as the deciding factor with regard to whether they will lend.
Do I need a license to be a private mortgage lender?
Whether or not you need a license to become a private mortgage lender will depend on the legal requirements of your province. For example, if you are a private mortgage lender in British Columbia and you lend more than ten mortgages per year, you will need to hold a recognized license as detailed in the Mortgage Brokers Act.
However, if you are a private mortgage lender in Alberta, you have the freedom to lend as much as you want because lenders there are not regulated. The catch in Alberta is that mortgage brokers who represent mortgage lenders are required to hold a license administered by the Real Estate Council of Alberta.
How much does it cost to become a private mortgage lender?
It used to be the case that only multi-millionaires could afford to become private mortgage lenders. However, today, it is a far more accessible and viable money-making opportunity, even for those who do not have millions stored away. Realistically, you could become a private mortgage lender with only $100,000 in your savings account. If you have industry knowledge and know what you are doing, it is possible to make large profits with small amounts of money.
Private mortgage lender services
If you want to get a private mortgage, it is highly recommended to do so with a trusted entity. The financial advisors at Refinancement Hypothecaire, are here to talk you through your options if you find yourself in financial trouble. We will talk you through the entire process, ensuring that you get the best possible deal with reasonable interest rates and limited additional fees.
We also offer other services including: